PG&E, Atmos Energy Benefit From $50 Billion Pipeline Upgrades

By Mark Chediak and Katarzyna Klimasinska -
Oct 15, 2010

U.S. plans to upgrade the nation’s
aging pipeline networks, which may cost an estimated $50
billion, will provide profit growth opportunities at regulated
utilities such as PG&E Corp. and Sempra Energy.

Safety concerns about the energy industry’s 2.5 million-
mile (4 million-kilometer) network of fuel pipelines are growing
among lawmakers, regulators and consumer groups after a pipeline
blast last month in a San Francisco suburb killed eight and
destroyed 37 homes. Oil leaks in suburban Chicago last month and
in rural Michigan in July have also focused attention on a
pipeline network that in some areas was laid a century ago.

Investment may benefit utilities such as PG&E, which can
pass on the costs to customers through rate increases that
include an allowance for profit, Paul Franzen, an analyst at
Edward Jones & Co. in St. Louis, said in an interview.

“This is a growth opportunity for companies that own
pipelines in the utility industry,” said Franzen, who doesn’t
own any shares of PG&E and has a “hold” on the stock. “The
unfortunate and tragic incidents underscore the importance and
need for an elevated level of investments in infrastructure.”

PG&E rose 22 cents to $46.91 at 9:34 a.m. in composite
trading on the New York Stock Exchange. Sempra rose 61 cents, or
1.2 percent, to $53.81.

PG&E’s plans to replace older pipes were “constrained” by
regulators, who capped spending they saw as unnecessarily
driving up customer bills, said Angie Storozynski, an analyst at
Macquarie Capital USA Inc. in New York, who doesn’t own shares
of the company and has a “outperform” rating on the stock.

$50 Billion Bill

Gas, oil and water pipelines in the U.S. require about $40
billion to $50 billion in investments for repair and rebuilding
as 80 percent of the country’s lines were built at least 40
years ago, Mohammad Najafi, director of the Center for
Underground Infrastructure Research and Education for the
University of Texas at Arlington, said in an interview.

The incidents in California and the Midwest may make
regulators approve rate increases for upgrade projects, Gregory Phelps, who oversees $3.8 billion at MFC Global Investment
Management US LLC in Boston, said.

“I have little doubt this will cause an acceleration in
the replacement of older pipeline infrastructure,” Phelps said
in a telephone interview.

Fixing pipelines so they are safer and easier to inspect
would represent a “huge capital opportunity,” Mark Snell,
chief financial officer of San Diego-based Sempra Energy, owner
of the largest U.S. natural-gas utility, said during an investor
conference on Sept. 16.

Reconsidering Cuts

After the Sept. 9 PG&E blast in San Bruno, California, the
California Public Utilities Commission is reconsidering its
decision to cut the amount of money PG&E can spend on building
and replacing pipelines to $174 million a year from a proposed
$235 million a year. PG&E and consumer groups said last month
that additional funding for pipeline safety should be taken up
as a separate matter.

The commission ordered PG&E, based in San Francisco, on
Sept. 12 to inspect its entire natural-gas system and make
repairs.

Michael Peevey, president of the five-member commission,
said it’s “possibly true” that PG&E may need to raise prices
to pay for safety improvements.

“I’m not in a position to make that call,” Peevey said in
a telephone interview. “We will cross that bridge when we come
to it.”

NTSB Report

The National Transportation Safety Board said a power-
supply malfunction might have caused a valve to open, leading to
a surge of pressure and the Sept. 9 explosion in San Bruno,
according to an Oct. 13 preliminary report.

The report is, in certain respects, positive for PG&E, Hugh Wynne, an analyst at Sanford C. Bernstein & Co. in New York,
wrote in an analyst note today. It “does not highlight any
glaring failure in PG&E’s operating procedures.”

PG&E proposed on Oct. 12 a plan to upgrade its pipeline
system including making pipe segments easier to inspect with
internal probes and possibly installing hundreds of automated
valves in populated areas to shut off leaking pipes remotely.

The pipeline in San Bruno took almost an hour to shutoff
manually and legislation has been proposed in the U.S. House and
Senate that would require installation of automatic valves in
high-risk areas, Wynne wrote.

PG&E didn’t provide a cost estimate for the improvements
and the source of funds will be determined after consulting with
regulators and industry experts, said Katie Romans, a
spokeswoman for the company.

Installation of new equipment could lead PG&E to seek rate
increases to pay for the improvements, said Franzen.

No ‘Blank Check’

While customers may be forced to pay more to make old lines
safer, they also will expect utilities to forgo some profit to
cover the expense, according to David Ashuckian, deputy director
of energy for the California commission’s Division of Ratepayer
Advocates.

“Concerns about PG&E’s pipeline safety cannot and should
not be addressed with a blank check,” said Mindy Spatt,
spokeswoman for the Utility Reform Network, a San Francisco-
based consumer advocacy group.

California regulators may penalize PG&E by reducing its gas
rates or requiring the company to spend money on safety and
maintenance that could not be recovered, Wynne wrote in an Oct.
6 note to clients. Wynne rates PG&E’s shares “outperform” and
doesn’t own any.

PG&E, owner of California’s largest utility, charged
customers almost $5 million in 2009 for scheduled repair work on
a “high-risk” pipeline about two miles north of the explosion
site, then delayed the work, according to documents filed with
regulators.

Delayed Work

PG&E determined the money should be spent on more urgent
projects, as permitted under regulations, Romans said. The
company has asked for the delayed project to be funded again in
its latest request to regulators.

Illinois regulators approved a $2.5 billion project in
January for Integrys Energy Group Inc.’s Peoples Gas, a natural
gas utility in Chicago, to replace and upgrade the city’s 100-
year-old pipeline network on the condition that expenses for the
20-year project are closely tracked and audited.

“We have put in place safeguards so that every penny
collected from customers will be accounted for,” Erin
O’Connell-Diaz, a member of the Illinois Commerce Commission,
said in a statement.

Texas regulators are considering whether to require the
state’s utilities to identify and replace distribution pipelines
most at risk of rupturing. The proposal comes after a “high”
number of leaks in steel gas pipes were reported to the
commission by Atmos Energy Corp., a Dallas-based utility, Ramona Nye, a spokeswoman for the commission, said in an e-mailed
statement.

Atmos plans to replace 100,000 steel distribution lines
over the next two years at a cost of 15 cents a month for each
customer, said Gerald Hunter, an Atmos spokesman.